As to your first inquiry, Jailbreaking was illegal because of the way the Digital Millenium Copyright Act restricts the circumvention of encryption, copy protection, and other digital security mechanisms. In short, it is not so much the possession of a jailbroken phone which was illegal, but rather the process by which the phone was jailbroken. A common analogy is to liken the DMCA's restriction to a law preventing the crossing of red lines in the road. If there is a public park on the other side of the red line, it is legal for you to be there, but illegal to walk across the line to get there. The recent LoC ruling essentially created an exception to the DMCA's restriction for the specific purpose of jailbreaking a phone for the purpose of installing additional software and expanding it's functionality.
Now, as to Why Jailbreak? In short, Jailbreak if there is an application you want to run which requires you to jailbreak. Apps available through Cydia and other repositories available to Jailbroken iPhone owners run the gamut from those rejected by Apple because they violate the App Stores Terms of Service in some way (Explicit content, use of hidden or illegal API's), apps from authors who disagree with Apples policies in administering the App Store, and apps which rely on functionality only available from other jailbreak apps.